CFA Level 1 Reading 53-Complete Exam
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Portfolio Standard Deviation with a Risk Free Asset ------- ✔ CORRECT ANSWER ✓✓When
calculating the the variance we are going to go through the formula for portfolio variance but
since the correlation and standard deviation of a risk free asset is 0 we are going to have a many
variable cancel out.
Portfolio Standard Deviation with a Risk Free Asset (Formula) ------- ✔ CORRECT ANSWER
✓✓Var = √w^2σ^2 + w^2σ^2 + 2wwσσCorr or
Var = √w^2σ^2 + w^2(0)^2 + 2wwσ(0)(0) or
Var = √w^2σ^2
Var = wσ
Combining Risk Free with Risky Asset ------- ✔ CORRECT ANSWER ✓✓When plotting this on a
graph, the risk-free acts as b in y = mx + b because with E(x) on the y axis, the risk-free asset
only adds return with no risk. The line of possible risk and returns is then only given by the risky
asset giving you the capital allocation line.
Market Portfolio ------- ✔ CORRECT ANSWER ✓✓When everyone has the same expectations of
what the return to risk will be so everyone has the same mix of risky assets.
Capital Market Line ------- ✔ CORRECT ANSWER ✓✓The line on the graph that gives you all of
the possible investment outcomes based on the amount of risk and return wanted with the
return of risk free added in.
, Capital Market Line (Formula) ------- ✔ CORRECT ANSWER ✓✓E(R) = Risk Free + (E(Rm) + Risk
Free / σ Risky ) σ Portfolio
Capital Market Line Slope (Formula) ------- ✔ CORRECT ANSWER ✓✓Slope = (E(Rm) + Risk Free)
/ σ Risky
Unsystematic Risk ------- ✔ CORRECT ANSWER ✓✓Risk that can be diversified away. Market
portfolios that hold the whole market have completely diversified away unsystematic risk.
Systematic Risk ------- ✔ CORRECT ANSWER ✓✓The risk can not be diversified away and
inherently come with investing in a particular market. Firms that have a high correlation
coefficient have high unsystematic risk but assets that have no correlation to the market have
very low unsystematic risk.
Total Risk ------- ✔ CORRECT ANSWER ✓✓The risk of the portfolio taking into account both the
systematic and unsystematic risk. The more diversification the portfolio has the less
unsystematic risk the fund has.
Total Risk (Formula) ------- ✔ CORRECT ANSWER ✓✓Total Risk = Systematic Risk + Unsystematic
Risk
Systematic Risk Assumption ------- ✔ CORRECT ANSWER ✓✓Investors will not be compensated
for risk that could be mitigated for free. To get rid of unsystematic risk all you need to do is
diversify.
Return Generating Models ------- ✔ CORRECT ANSWER ✓✓Use to estimate the expected returns
on risky securities based on specific factors. This can take into account macroeconomic,
fundamental, and statistical factors.
Study Guide with Verified Answers |
Guaranteed A+
Portfolio Standard Deviation with a Risk Free Asset ------- ✔ CORRECT ANSWER ✓✓When
calculating the the variance we are going to go through the formula for portfolio variance but
since the correlation and standard deviation of a risk free asset is 0 we are going to have a many
variable cancel out.
Portfolio Standard Deviation with a Risk Free Asset (Formula) ------- ✔ CORRECT ANSWER
✓✓Var = √w^2σ^2 + w^2σ^2 + 2wwσσCorr or
Var = √w^2σ^2 + w^2(0)^2 + 2wwσ(0)(0) or
Var = √w^2σ^2
Var = wσ
Combining Risk Free with Risky Asset ------- ✔ CORRECT ANSWER ✓✓When plotting this on a
graph, the risk-free acts as b in y = mx + b because with E(x) on the y axis, the risk-free asset
only adds return with no risk. The line of possible risk and returns is then only given by the risky
asset giving you the capital allocation line.
Market Portfolio ------- ✔ CORRECT ANSWER ✓✓When everyone has the same expectations of
what the return to risk will be so everyone has the same mix of risky assets.
Capital Market Line ------- ✔ CORRECT ANSWER ✓✓The line on the graph that gives you all of
the possible investment outcomes based on the amount of risk and return wanted with the
return of risk free added in.
, Capital Market Line (Formula) ------- ✔ CORRECT ANSWER ✓✓E(R) = Risk Free + (E(Rm) + Risk
Free / σ Risky ) σ Portfolio
Capital Market Line Slope (Formula) ------- ✔ CORRECT ANSWER ✓✓Slope = (E(Rm) + Risk Free)
/ σ Risky
Unsystematic Risk ------- ✔ CORRECT ANSWER ✓✓Risk that can be diversified away. Market
portfolios that hold the whole market have completely diversified away unsystematic risk.
Systematic Risk ------- ✔ CORRECT ANSWER ✓✓The risk can not be diversified away and
inherently come with investing in a particular market. Firms that have a high correlation
coefficient have high unsystematic risk but assets that have no correlation to the market have
very low unsystematic risk.
Total Risk ------- ✔ CORRECT ANSWER ✓✓The risk of the portfolio taking into account both the
systematic and unsystematic risk. The more diversification the portfolio has the less
unsystematic risk the fund has.
Total Risk (Formula) ------- ✔ CORRECT ANSWER ✓✓Total Risk = Systematic Risk + Unsystematic
Risk
Systematic Risk Assumption ------- ✔ CORRECT ANSWER ✓✓Investors will not be compensated
for risk that could be mitigated for free. To get rid of unsystematic risk all you need to do is
diversify.
Return Generating Models ------- ✔ CORRECT ANSWER ✓✓Use to estimate the expected returns
on risky securities based on specific factors. This can take into account macroeconomic,
fundamental, and statistical factors.
